Funding a Roth is a last resort?

[Markola]

This Go Curry Cracker blog post takes a bit of concentration but the author spells out a prioritized order of savings vehicles with evidence and logic. As is often the case in personal finance, simple wins or, at least, there is a strong case to be made for simple, which appeals to me. Personally, we think our tax rate will be lower in FIRE than while w*rking so we aren't planning to do further Roth contributions or back door exchanges.

The Great Roth Controversy - Go Curry Cracker!

 

[Fedup]

I do both when I was working. When my income was high, I do the non-deductible and then immediate Roth conversion. The reason is if you have savings besides IRA and 401k, you don't have to worry about tax about that pot of money.

 

[cathy63]

It depends on your individual situation and what savings vehicles you have available to you. If you have a high salary and a traditional 401K at your employer (which was our situation), then your options are limited.

You can fully fund your 401K, but you can't make a deductible contribution to an IRA so you can't get any more pre-tax savings. You can't contribute directly to a Roth because your income is too high. So the only things you can do with after-tax savings are put it in a regular taxable account, make a non-deductible tIRA contribution or do a back-door Roth conversion. You're better off doing the back door conversion with as much as you can because at least it will grow tax free from there.

In DH's case, we did the back door conversion once that strategy became available. His entire tIRA was after-tax savings, so we converted it all, paid tax on the gains to date and added $6500 every year while working.

In my case, I had previously rolled over 401Ks from several jobs into my tIRA, meaning most of it had never been taxed, so conversion was impractical and the back door conversion strategy was unavailable to me. I just continued to make non-deductible contributions to my tIRA. I'm doing some conversions now that we're in ER and have low tax rates.

 

[exnavynuke]

This Go Curry Cracker blog post takes a bit of concentration but the author spells out a prioritized order of savings vehicles with evidence and logic. As is often the case in personal finance, simple wins or, at least, there is a strong case to be made for simple, which appeals to me. Personally, we think our tax rate will be lower in FIRE than while w*rking so we aren't planning to do further Roth contributions or back door exchanges.

The Great Roth Controversy - Go Curry Cracker!

I like how the author assumes the people are paying the full amount of taxes and have no deductions or credits to speak of outside of those associated with investing... totally realistic as no family making the median income has any tax breaks they use.

I also like how he completely ignores the fact that the Roth IRA also provides benefits such as no RMD's, which can save tons of money on taxes in later years.

The nice thing about "simple" is that it makes things seem "easy". The bad thing about "simple" is that it isn't realistic because these things just aren't that simple.

I'm covered by a retirement plan at work. I cannot deduct any tIRA contributions because my modified AGI is over $72k. Until I get that mAGI above $133k, I can still contribute to a Roth IRA. Doesn't look like that option is covered by the "simple" author...

 

[Markola]

It depends on your individual situation and what savings vehicles you have available to you. If you have a high salary and a traditional 401K at your employer (which was our situation), then your options are limited.

No doubt. That is our salary situation, fortunately, though DW does have a Roth 401K option at work, which we are not using. I try not to let taxes be the primary driver of my decision-making. Our primary concern is to have money when we can't work anymore and the best solution to that, IMHO, is to accumulate, well, more money. If I'm paying more in taxes while working due to Roth contributions and conversions, then I am setting aside less now that could compound. I'll worry about lessening minimum required distributions someday when we're in a lower tax bracket and can see the RMD date on the horizon.

It does depend on individual circumstances, but the author's logical sequence of priorities makes sense to me. Of course, know yourself and YMMV.

 

[Greencheese]

I feel like a Roth can be extremely valuable when dealing with things such as tax credit cliffs with the ACA. Never hurts to have options so you don't get backed into a corner...

 

[NgineER]

It depends I guess. I plan to have enough that I'd be in the same tax bracket as now. Having a Roth IRA gives you flexibility. I max out 401k, add after tax 401k contributions and Roth rollovers to hit the top of 15% tax bracket. I have lots of deductions now with 4 kids, income property depreciation, two mortgages and a spouse. At some point more and more of those deductions will go away, I hope the spouse won't, but one of us will perish eventually and then it will be a whole different tax situation.

 

[nash031]

I feel like a Roth can be extremely valuable when dealing with things such as tax credit cliffs with the ACA. Never hurts to have options so you don't get backed into a corner...

This is our plan. We can't predict the future... best guess is we pay lower taxes in the future, but ultimately we have some flexibility because we have both Roth and Traditional accounts through various IRAs and 403b.

 

[jzajzz]

how about the advantage of predictability .. your streams of income is more predictable in a Roth ... since you know it won't get taxed .. also you won't have to deal with RMD's

 

[Markola]

how about the advantage of predictability .. your streams of income is more predictable in a Roth ... since you know it won't get taxed .. also you won't have to deal with RMD's

True that you will have untaxed income someday but you do get taxed up front when you pay into a Roth, in that you are using post-tax dollars vs. pretax in a T-Ira or 401k. And you do pay tax on conversions now. So the question is, do you want to pay tax now by saving dollars taxed at your current rate in a Roth vehicle or later by withdrawing them from a traditional IRA at a future rate, when perhaps your tax rate will be lower than now.

 

[SevenUp]

This Go Curry Cracker blog post takes a bit of concentration but the author spells out a prioritized order of savings vehicles with evidence and logic.

It's unfortunate that the "evidence and logic" includes the fallacy that one saves at the marginal rate but withdraws at the effective rate.

Need to look at marginal rates for both saving and withdrawing to make the correct choice between traditional and Roth.

Yes, most early retirees will be better served with traditional, but the advantage is not as extreme as that article suggests.

 

[jzajzz]

True that you will have untaxed income someday but you do get taxed up front when you pay into a Roth, in that you are using post-tax dollars vs. pretax in a T-Ira or 401k. And you do pay tax on conversions now. So the question is, do you want to pay tax now by saving dollars taxed at your current rate in a Roth vehicle or later by withdrawing them from a traditional IRA at a future rate, when perhaps your tax rate will be lower than now.

I understand how they work but my point was that with the Roth .. I know what my tax rate is now .. and in retirement I don't have the flexibility of being able to adjust when the tax rate might be 20% one year but 25% the next because of policies.. The point of a community like this is to sacrificing the now to reap the benefits in retirement.. so I would want my retirement income to be as predictable as can be..

 

[SevenUp]

I understand how they work but my point was that with the Roth .. I know what my tax rate is now .. and in retirement I don't have the flexibility of being able to adjust when the tax rate might be 20% one year but 25% the next because of policies.. The point of a community like this is to sacrificing the now to reap the benefits in retirement.. so I would want my retirement income to be as predictable as can be..

Some people may not have much flexibility. Others will. Particularly those who retire with some time before SS and/or pension income starts.